Chapter 3 - Measuring business income. This chapter defines the concept of business income, discusses the role of adjusting entries in the measurement of income, and demonstrates the preparation of financial statements. | Measuring Business Income Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University Chapter 3 Learning Objectives Define net income and its two major components, revenues and expenses. Explain how the income measurement issues of accounting period, continuity, and matching are resolved. Define accrual accounting and explain two broad ways of accomplishing it. Learning Objectives (cont’d) State four principal situations that require adjusting entries and prepare typical adjusting entries. Prepare financial statements from an adjusted trial balance. Supplemental Objective Analyze cash flows from accrual-based information. Profitability Measurement: The Role of Business Income Objective 1 Define net income and its two major components, revenues and expenses Profitability is the ability to earn enough income to attract and hold investment capital Profitability is a major goal of a business For a business to survive, it must earn a profit The term profit has many meanings | Measuring Business Income Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University Chapter 3 Learning Objectives Define net income and its two major components, revenues and expenses. Explain how the income measurement issues of accounting period, continuity, and matching are resolved. Define accrual accounting and explain two broad ways of accomplishing it. Learning Objectives (cont’d) State four principal situations that require adjusting entries and prepare typical adjusting entries. Prepare financial statements from an adjusted trial balance. Supplemental Objective Analyze cash flows from accrual-based information. Profitability Measurement: The Role of Business Income Objective 1 Define net income and its two major components, revenues and expenses Profitability is the ability to earn enough income to attract and hold investment capital Profitability is a major goal of a business For a business to survive, it must earn a profit The term profit has many meanings depending on who is interpreting it Economists Lawyers Accountants Accountants prefer to use the term net income Net Income is the increase in owner's equity that results from the operations of a company Net Income = Revenues – Expenses When expenses exceed revenues a net loss occurs Revenues Increases in owner's equity resulting from Selling goods Rendering services Performing other business activities Not all increases in owner's equity arise from revenues Increases resulting from owner's investments do not represent revenue When a company earns revenue, it usually receives Cash A promise to be paid in the near future Recorded in either Accounts Receivable or Notes Receivable Revenues (cont’d) Liabilities are usually not affected by revenues Transactions that increase cash and other assets but are not revenues A bank loan Increases liabilities and cash Collection of accounts receivable Increases cash and decreases accounts receivable Revenue was previously recorded when the sale .
